The ATO is focusing on multinational companies it says are in the “red zone” for tax deductions and cross-border “related party loans”.

The Tax Office has issued guidelines to tell companies whether their loan arrangements with related parties (such as foreign subsidiaries) trigger a “high” or “low” risk of being audited, or even court action.

The ATO says its guidelines could be useful for “any financing arrangement [inbound and outbound] entered into with a related party that is not a resident of Australia”.

The government agency reports that for the 2014-15 income year, “total related party loans equalled $420 billion”.

Companies make related party loans to major shareholders, business affiliates and subsidiaries for a variety of reasons.

While they are legitimate financing arrangements, the ATO says some corporate loans are not genuine “arm’s length” transactions, and so could breach transfer pricing provisions.